ECONOMICS I. 



A SUMMARY 



OF 



HADLEY'S ECONOMICS. 



.^ 



/ 

^^=SK;gCONOMlCS I. 



aV 




ADLEY'S ECONOMICS. 



WITH AN APPENDIX CONTAINING SUGGESTIVE 
TOPICS FOR REVIEW. 



A CONVENIENT HAND-BOOK FOR PREPAR- 
ING THE WEEKLY WRITTEN 
QUESTIONS AND ALL 
EXAMINATIONS. 

Copyright by Edw. W. Wheeler, vr \ 



€nmbxti}m, ^ass. 
E. W. Wheeler, Printer, \ 
1898. 



This Summary is intended to replace the text book in 
preparing for the examinations, and will also be found 
extremely useful during the year in answering the weekly 
written questions. The questions at the end have been 
prepared especially as a guide for review. 



c,vv\c: or %"-^ 




^ ^ n "i s^ 



>- 1 i 



1896?..,: 



SYNOPSIS OF IIADLEY'S 
ECONOMICS. 



CHAPTER I. 



Political economy is the art which helps the statesman to promote 
public wealth. The laws of this art are the basis of the science of 
economics. Sect. i. 

Public wealth is the utility and benefit both morally and physically 
of the various properties of the nation. Property of the nation in- 
cludes both private property, government property, and all the ad- 
vantages of the country, such as good climate, etc. Sect. 2. 

A property right is a title to a part of the public wealth. Property 
rights may be created or destroyed without increasing or diminish- 
ing public wealth. Sect. 3. 

The wealth of a community depends on the utilization of the 
means of public enjoyment. Public wealth is a flow, not a fund. 
It is to be measured as income, not as capital. Sect. 4. 

The capital of an individual or a community is the amount of wealth 
in existence at that time. The income is the amount of wealth ob- 
tained during a certain period. Capital and income may be con- 
verted, each into the other. Sect. 5. 

Wealth is the means of enjoyment. The use of this is the public 
income. The total amount of public income at any moment is the 
public capital- Ordinarily the term public capital is applied to that 
capital which is employed for production. Sect. 8. 

Private wealth is the right to a part of public wealth. The amount 
which accrues to this is private income. The total amount of these 
rights, at any moment, is private capital. Ordinarily the term private 
capital is applied to that part of those rights which is applied to 
production. Sect. 8. 

The mercantile system of political economy taught that the na- 
tion should strive to make money in the same manner as the indi- 
vidual. The nation should get rich by selling more than it bought. 



The excess of exports over imports was looked on as the index of 
national prosperity. Sec. 9. « 

The physiocrats said that national power lay not in the supply of 
gold and silver, but in the supply of food. Sec. 10. 

They laid too much stress on the quantity of food as a measure 
of public wealth and too little on its utilization. Sec. 11. 

Adam Smith showed that private wealth was a powerful agency 
for furthering public wealth. Sec. 11. 

Formerly trade was a struggle between buyer and seller. Today 
it is regarded as a mutual service. Sec. 12. 

This is the first result of Adam Smith's perception. Sec. 12. 

A second result was the change in the attitude of economists to- 
ward state interference. The restrictions to prevent extortion also 
prevented mutual service. The doctrine of "laissez faire" (go as 
you please) was introduced. Sec. 13. 

A third result was to make people look on political economy as a 
science rather than an art. Economics is the science of the laws of 
business; it is not the art of conducting business. Sec. 14. 

In economics, law has two meanings. A natural law is an ob- 
served sequence of cause and effect. A positive law is a command, 
both moral and jural, relating to wealth. Sec. 15. 

"Laissez faire" led to individualism and freedom. This led to 
the view that private property is good, because it was seen that free- 
dom in other things had good results. Sec. 17. 

The socialist distrusts that the loss from individual freedom out- 
weights the gain. He believes the evils of individual freedom out- 
weigh the gain. Sec. 18. 

The individualist glorifies the pursuits of wealth since it is the 
means of mutual service. Sec. 19. 

Individualism calculates the large and remote results. Socialism 
looks to the details. Too much state action tends to create new 
evils. The good of state action is often tangible. But the evils are 
much more indirect and bad because by their subtlety they are not 
seen until they have become very bad indeed. Sec. 20. 

Laws and institutions are the result of natural selection. Sec. 21 . 

Education and imitation perpetuate in children the useful qualities 
of their fathers. Sec. 22. 

The human struggle for existence is between groups rather than 
individuals. It is a struggle more for domination than annihilation. 
This is true also of some of the higher animals ; ants, for instance, 



have institutions and usages, which are like those of semi-civilized 
man. Sec. 23. 

In man physical characteristics are strikingly alike. In animals 
they are different. Sec. 24. 

In the community we have a natural selection of ethical types 
rather than physical ones. This is a danger to the strength of the 
community. Sec. 25. 

Economics and ethics are closely connected. The preservation of 
the ethical type is not good because it is not economically beneficial. 
The present system of society is good because it prevents the group 
type from becoming rigid, and its laws and customs so inflexible as 
to render it unable to adapt itself to changed conditions. Sec. 26. 

Economics is studied historically and deductively. Economics 
must be studied with ethics, historically. Sec. 28. 

CHAPTER II. 

As civilization progressed man learned to accumulate his income 
jnto capital. Sec. 29. 

The accumulation of capital permitted the institution of slavery. 
Sec. 30. 

The condition of serfdom gave to the people who lived under it 
a positive advance in present enjoyment and in possibility of prog- 
ress. Sec. 31. 

Slavery, by its nature, offers little incentive to increased efficiency. 
Sec. 32. 

The two facts that capital originated in robbery and labor in slav- 
ery do not prove that the capitalist is a thief or the laborer an in- 
ferior. Sec. 33. 

The progress of slavery raised the question of the legal owner- 
ship of animals and slaves. Sec. 34. 

The slaves enal:)led their owners to reach a higher state of moral 
development. They also helped to make society more secure. 
Therefore they were public wealth. Sec. 35, 

By tending to preserve peace and to increasing the accumulation 
of property, slavery led to the humanizing influences of family life. 
Sec. 36. 

This led to the gradual necessity for peace and order, in order to 
secure the protection of accumulated wealth. Sec. 37. 

From this, followed the recognition of rights among slaves. This 
culminated in their emancipation. Sec. 38. 



6 



The emancipation often increased public wealth by making more 
efficient workmen of the slaves. Sec. 39. 

The change from slave to free labor took place first in manufac" 
tures, then in agriculture. The metayer system provided that a 
certain share of the produce be surrendered to the proprietor of the 
land. This was the first step toward free labor in agriculture. Sec- 
40. 

The free country is richest and most powerful in long war. Eman- 
cipation, therefore, became a political necessity. Sec. 41. 

The greater efficiency of the labor of the North helped overcome 
the South. Sec. 42. 

Emancipation often has effects of doubtful good. Serfdom is 
often a good thing. Sec. 43. 

In Russia the slave has become, by emancipation, the slave of the 
money lender. Sec. 44. 

Emancipation makes the slave depend on himself. This local" 
izes poverty. The deserving poor are few. There are less famines 
now, because every man looks out for himself. Sec. 45. 

Poverty is diminishing. Industrial inequality has come to be a 
grievance. Much poverty is due to causes for which the poor are to 
blame. Sec. 46. 

Malthus said that poverty was the necessary accident of the 
struggle of existence. Society could not provide work for all. If 
this is so, there is no need to attempt to eradicate poverty. If pov" 
erty is preventable, the claims of our civilization for favorable judg" 
ment can hardly stand for a moment. Sec. 47. 

Malthus said that population was bound to increase faster than 
the efficiency of production. Some, therefore, will lack food. Sec- 
48. 

A low death rate is an index of social prosperity. Sec. 49. 

If the productive efficiency increases as fast as population, agri- 
cultural products will not be subject to the law of diminishing re- 
turns. Sec. 50. 

The children of those who have married young die for lack of 
proper care and support. Sec. 51. 

Generally the improvements in production of food will not keep 
pace with the possible excess of the birth rate over the death rate. 
Sec. 52. 

The pressure of population on subsistence serves as a stimulus to 
improvements in the arts. If the state provided for every child (1) 



the stimulus to be self-supporting would be taken away, (2) the nat- 
ural selection of the stronger families and individuals would cease 
and the race would find a dead level, (3) the capital of the community 
would be impaired by increased consumption and diminished pro- 
duction. In order to restrict population each individual must be 
responsible. Poverty, then, would exist through neglect of this 
responsibility. Sec. 54. 

The opponents of Malthus say (i) Population never presses on 
subsistence. There is food enough if it were only properly distri- 
buted. (2) If there were a more equal distribution of food popula- 
tion would not be likely to press on subsistence, because increased 
comfort lowers the birth rate. Sec. 55. 

These critics overlook the fact that the surplus of food is the re- 
sult of family responsibility. Private property and family life stim- 
ulates production in all but this lowest. Sec. 56. 

Increased comfort does not lower the birth rate necessarily, lioth 
are the result of prudence. Sec. 57. 

Fear of loss of social standing lowers the birth rate more than 
that of starvation. Social ambition in itself does not prevent an in- 
crease in population, but the need of subsistence is felt by all. 
Those who possess it are stamped as bearing a higher intellectual 
morality. Prudence is the prime cause of all restraint. Sec. 58. 

The waste of more power in the exercise of prudence is a real evil. 
This may lead to physical and moral evils. Sec. 59. 

This danger is slight. The modern family and the law of capital 
have been checks on population. A change in economic institutions 
changes the average character. Sec. 60. 

Natural selection and functional adaptation alone cannot regulate 
population, individual responsibility can. Sec. 61. 

We must look out for the poor and unfortunate though the pro- 
cess of natural selection be hampered. The ethical loss would far 
outweigh the gain. Sec. 62. 

Criminals should not reproduce. If the pauper wont work he is a 
criminal. Whether he can work, will work or can't find it demands 
different treatment. Sec. 63. 

Indiscriminate charity fosters pauperism. Sec. 64. 

Wilful paupers should be separated from the rest. Sec. 66. 

The work test determines the kind of pauper. The attempt to 
make the work useful is good, but it must not interfere with its 
character as a test. Sec. 67. 



These efforts take three forms, i. Public works. 2. Labor 
colonies. 3. Advances or loans of money to be repaid. None have 
succeeded. Sec. 68. 

It is asserted that public works preserve the laborer's self-respect. 
They cannot be constructed in the winter when this need is greatest. 
It diverts from other employment some who would have found work. 
The preservation of self respect is more apparent than real. It is a 
queer notion of self-respect that leads a man to accept money out of 
the public treasury through political chicanery. In agriculture, how- 
ever, there is no particular attraction, and the danger of undue 
diversion from other trades, and of political chicanery is slight. Sec. 
69. 

Labor colonies do not reach the right people generally. They do 
not teach men self support. They become places of refuge for the 
vicious poor. No association of w^orkmen is in a position to guar- 
antee the utility of its future product. If the advances by the state 
were to be confined to agriculture the danger would be much less. 
England recently has lent money to the poor to buy land. The plan 
is good but not of sufficient standing to insure success. Sec. 70. 

The German bureaus of information have been quite successful, 
because the police system is so efficient. It is impossible to provide 
food and lodging for those seeking work without great danger that 
such relief will be misused. Much pauperism is due to the stub- 
bornness on the part of the individual against taking certain kinds 
of work. Sec. 71. 

Compulsory insurance is another means of reducing pauperism. 
The laborers are required to contribute to the fund while they work. 
The saving may be out of the necessaries, luxuries or savings. If 
this compulsory saving is out of his necessaries it lessens his labor 
power and that of his children. If it is out of his luxuries, all well 
and good, but it generally does not come from this source. If it 
comes out of his savings it tends to make him dependent instead of 
self supporting, because it takes away the stimulus to save, which 
makes the labor self responsible. Sec. 72. 

Compulsory saving does not give the moral and educational results 
which voluntary saving gives. Sec. 73. 

There is also danger that the amount of accidents and sickness 
will increase. Already the number of railroad accidents in Germany 
has increased. This shows that the diminution of personal respon- 
sibility lessens the incentive to work. Factory insurance can be 



9 

carefully supervised. Government insurance cannot be easily 
guarded against fraud. Sec. 74. 

Insurance tends to decrease individual responsibility. This is not 
good either ethically or economically. Sec. 75. 



CHAPTER III. 

As society advanced trade increased. As this went on prices be- 
gan to be regulated by the law of demand supply instead of by cus- 
tom. Sec. 76-77. 

As machinery replaced hand labor the division of labor became 
greater. Sec. 78. 

Freedom in production and trade is accompanied by increased 
freedom of consumption. All business which is injurious to other 
business is for the most part prohibited by law. Prostitution and 
the sale of liquor are tolerated because the doctrine of " laissez 
faire " has gained such strength. Sec. 79. 

Public opinion and knowledge can enforce those laws where vio- 
lations are public. Much compulsory legislation has to be supported 
by the state; e. g., public schools. Sec. S0-81. 

Custom and public opinion determine what people shall buy for 
the most part. Sec. 82. 

Formerly wealth was reckoned in cattle, land, etc. Now it is 
reckoned in the ability to command a price. Price, in its broadest 
sense, is the quantity of one thing which is exchanged for another. 
Sec. 83. 

Money facilitates trade. It must be homogenus an invariably 
acceptable. Prices are at present measured in money. Sec. 84-85. 

Isolated transactions are bargaining ones. Sec. 86. 

Competition is the effort of rivals to dispose of their goods. It 
may be suspended by a monopoly, by custom, ignorance and senti- 
ment. Sec. 87. 

The place where prices are determined by competition is a market. 
The essential thing in a market is that the buyer and seller know 
the prevailing rate. Sec. 88. 

The supply of an article is the amount available at a given price. 
The demand is the amount that will be taken at a given price. 
Where demand equals the supply, there is the market price. Sec. 
89-90. 



10 

A curve may be made to represent this. Where the supply curve 
cuts the demand curve, there is the market price. Sec 91. 

Additional increments in quantity of the article of consumption 
do not bring proportionate increase of enjoyment or utility. Sec. 92. 

The relation of demand to supply varies with different articles. As 
the supply increases people are willing to pay less and less for it. 
With some articles no increase in the supply will increase the de- 
mand. Sec. 93. 

In a state of competition, price is fixed by the self interest of the 
buyers. In the absence of competition prices are fixed by law or cus- 
tom. In the latter case there is no variation in price possible which 
would mark a scarcity in the supply. Besides a price which is fixed 
by law or custom prevents often, by its injustice, an adaptation of 
the quantity of service to the needs. Sec. 97. 

If the supply exceeds the demand while prices remain the same 
either by custom or law, the sales will be fewer than the supply. 
This will accumulate stock which either will have to depreciate or 
form such a glut on the market that it will have to be sold at a sac- 
rifice. Receding prices warn producers that there is an increased 
supply. Sec. 98. 

Competition tends to make the price proportional to the cost of 
production. This price is the normal. Commercial competition fixes 
the market price. Industrial competition adjusts supply and de- 
mand. This results in the approximation to the normal price. Sec. 

ICO. 

This process is prevented (1) by the absolutely fixed quantity of 
some articles ; (2) by the monopoly of some articles ; by the uncer- 
tainty of the phrase " expense of production." The " normal " 
generally is measured by the expense of producing additional sup- 
plies by those who go into the business at a disadvantage ; {4) bye- 
products. It is hard to estimate their cost ; (5) the process of invest- 
ment is so slow that new inventions may often create a new normal 
before the original readjustment is made. The expense and the 
slowness of starting a railroad is an example. Sec. loi. 

The adjustment of market price to the normal is important. Sec. 
102. 

A price is a fact. Value is an estimate of what the price ought 
to be. It often means a proper or legitimate price. In this sense 
value means worth. A theory of price explains business. A theory 
of value passes judgment on its morality or advisability. Sec. 104. 



11 



There are two theories of value, the commercial or competitive, 
and the socialistic theory. The former bases value upon what the 
buyer is willing and able to offer. The socialistic theory bases value 
on what it has cost the seller in the way of toil and sacrifice. The 
competitive theory explains price as the value it would command 
under perfectly free competition. Sec. 105. 

The socialists allege that the relative effects of free competition 
are unfair. The most disagreeable task ought to be the highest 
paid. Expense in money is very different from expense in human 
toil and sacrifice. Trade consists in getting goods for less than 
their value and selling them for more. Profits are unfair extortions. 
Sec. 106. 

We admit that labor is not paid by its agreeability. We admit 
that there is an inconsistency between our doctrine of equal political 
rights and the facts of the industrial world. If you reward labor 
according to its difficulty of execution you will have no means of 
easily determining when the supply equals the demand. The Gov- 
ernment would have to establish the number in each trade. This is 
industrially and politically a very bad method. Under the present 
regime able men have a chance to rise honestly. In socialism the 
chance would be by political influence. Sec. 107. 

The socialistic theory takes away the premium for efficiency. 
Time which was wasted would count for as much as time well spent. 
Trade is not robbery. Almost all large incomes are deserved. The 
commercial theory is better because it puts a premium on efficiency. 
Sec. 108. 

CHAPTER IV. 

Law and moral sense look down on gambling as an evil. Sec. 
109. 

The man who risks one half of his income risks the loss of a large 
amount of comfort for an even chance of gaining a smaller amount 
of comfort. It is a poor business investment. It also tends to des- 
troy the sense of moderation and self-respect. Gambling is, for the 
most part, an attempt to get something for nothing. Sec. no. 

Insurance is a form of gambling in so far as it is a wager as to 
one's lifetime. It is justifiable because it puts money, when it is 
needed, where it has a high utility to society and to the individual. 
The possibility of securing it is a source of security and industrial 
efficiency. Sec. in. 



12 



All trade is more or less of a speculation. It is a question 
whether speculation is gambling or not. It depends on the indi- 
vidual cases. This is why the socialist legards trade as an evil. 
He admits that it does a necessary work of distribution, but they 
say that the profits between the buying and selling are unjust and 
extortionate. Sec. 113. 

The speculator does a service to the community when he buys 
goods when cheap and sells them when dear. He lessens the bur- 
den which would fall on the community by the increased cost of 
goods. Sec. 114. 

Anything which tends to prevent the fluctuation of goods undoes 
the service of distribution (putting goods where they are needed). 
Sec. 115. 

The less accurately the comparison can be made of the relation of 
demand and supply in different markets, the more speculative the 
trader's possible profit becomes. Sec. 116. 

Formerly business was more speculative for this reason. Now it 
is an "arbitrage " (mutually beneficial exchange). Sec. 117. 

Formerly speculation existed by taking advantage of differences 
of prices of different places. Now it is by taking advantage of the 
differences in prices of different times. Sec. 118. 

This kind of speculation tends to diminish the fluctuation of mar- 
ket prices if it is legitimately carried on. Sec. 119 

The man who purchases grain for the excitement of the wager is 
just like the man who bets on the horse race. Speculation on 
" margins " is just like this. Sec. 120. 

A corner is where a man or body of men get hold of all the avail- 
able supply of a commodity, and compel those, who have made con- 
tracts to deliver it, to pay an exorbitant price. This hurts honest 
speculators, producers and consumers. The harm to business 
methods and morals is much though it is indirect. Sec. 120. 

Legislation must limit only the illegitimate speculation. Much 
legislation in the past has defeated its own objects. Sects. 121-122. 

The difference between legitimate and illegitimate legislation is in 
the tention not in the form. Public opinion, and a strict enforce- 
ment of the law, would be beneficial. A man should use his own 
capital; this makes him less rash. Sec. 124. 

With borrowed capital a man can be as reckless as he will. Pub- 
lic opinion should check his career. No law will be required in 
that case. Sec. 125. 



13 

The employers of labor are those who are able ami willing to 
speculate in the products of labor. The more remote the realization 
of the speculation the more uncertain it is, and the more speculative. 
Sects. 126-127. 

Great undertakings could not be undertaken under the socialist's 
regime, because the utility in the future would not be known until 
it had been built. If every man was paid by the work he had done 
in making utilities, he would have to receive nothing for his work if 
his work proved useless. The uncertainty of new projects is well 
seen in impractical inventions. Sects. 127-128. 

The inventor uses his own capital. The inventor's success is 
large, to compensate risk, and to attract inventors. Sec. 129. 

Property is an incentive to gain control of the industrial actions 
of other men. Sec. 130. 

This motive has three effects: (i) An increase of accumula- 
tion, which, by its investment, increases public wealth. (2) A pro- 
cess of natural selection which preserves those able to manage 
capital. (3) Increased intensity of speculation which results from 
the prose and greater competitors. Sec. 131. 

Profits are not immoderate. They are fast becoming less in pro- 
portion to the capital invested. Sec. 132. 

This system has resulted in industrial profits. The losses it has 
entailed are its severest indictments. Sec. 133. 

If natural selection does not preserve the men who best serve 
themselves by serving the public, we may let socialism look after 
the responsibilities attached to great wealth. Sects. 134-135. 

CHAPTER V. 

Wages are advances of capital to the laborers. .Sec. 136. 

Their security is necessary to society. Law often makes them 
exempt from attachment in order to better protect the laborer. 
Sec. 137. 

The risk of production should be borne by the capitalist and not 
by the laborer. Sec. 138. 

The amount of capital consumed in production is known as the 
cost of production. Private cost is better known as expense. The 
excess of return above expense is private profit. This is measur- 
able. Public profit is not. Private profit is justifiable because it 
conduces to public profit. Sec. 139. 



14 

The expectation of profit leads to investment. Capital invested 
for a remote return is fixed capital. This increases with the advance 
of society. Sects. 140-141. 

The economic institutions of society should encourage invest- 
ment. The most important institution is that of private property. 
It is justifiable because it fosters investment. Sec. 142. 

Property right is better than government ownership, (i) It 
offers incentive to improvement. (2) It generally will yield more 
taxes to the government by reason of the increased value due to the 
improvement. Sects. 143-144. 

Property right is best when the owner is the occupier. It is good 
when the occupier is the owner's agent. If the land owners oppi-ess 
the tenants juidicial rents should replace competitive ones. Sec. 
145. 

All land speculation is not hurtful. Sec. 146. 

Grants of monopoly in manufactures as inland stimulates their 
development. Sec. 147. 

Patents are short guarantees of monopoly which make invention, 
and investment therein possible. Copyrights are justifiable for the 
same reason. Sects. 148-149. 

The public gains, attendant on the transplantation of a process, 
are far less than those which are attendant on those which have 
been wholly untried. Sec. 150. 

Where grants of monopoly are impractical subsidies are granted. 
Sec. 151. 

A practical means of encouraging investment is the modern system 
of interest. It is justifiable because it encourages capital to be 
used that would be idle or wasted. Sec. 152. 

The ratio of selling price to the income is the rate of capitaliza- 
tion. For instance, a piece of land is worth $2,000 ; its income is 
jgioo; the rate of capitalization is 5 per cent. Sec. 153. 

Saving banks and insurance companies lead people to save by the 
benefits which accrue. Sec. 154. 

Among ignorant non-commercial people usury laws are good. 
Sec. 155. 

In commercial communities they are a hindrance because they 
prevent just investments of capital often times. Sec. 156. 

Usury laws are circumvented. The borrowers are hurt by the 
honesty of the honest, and by the high charges of the unscrupulous. 
The more honest lenders, by keeping out of the market, aggravate 
the scarcity of money loanable. Sec. 157. 



15 

Loans are justifiable by the productiveness of the thing it is to be 
used for, rather than by the wants of the person who borrowed it. 
If a loan leads to a productive thing the borrower should have 
every chance to attract capital to it. If the loan will not be pro- 
ductive the lenders should have little inducement to lend it. The 
creditor has to look to the investment rather than to the borrower's 
person. Sec. 158. 

The small liability of the members of corporations protects them 
from unwise directors. In partnership, however, the members are 
justly liable. Sects. 159-160. 

An over-production of machinery causes a commercial crisis. It 
is wrong to say that the harm comes from too great investment of 
capital. More often there is too little investment. Sec. 161. 

There are no " absolute " or " natural " rights to land. Property 
right is the chief modern incentive to labor care and avoidance of the 
waste of capital. The rights of capital are narrower. They effect 
the methods of management rather than the motives on which it is 
founded. To modify the method is easy ; to modify the motives is 
to remove the substruction of society. Sec. 163. 

The presence of the modern orginization of capital is per se the 
strongest proof of its vitality. The maintenance of the rights of the 
capitalists is vital to our growth. Sec. 164. 

CHAPTER VI. 

The investment of fixed capital has wrought more radical changes 
in manufactures and transportation than in agriculture. The pro- 
ductiveness of manufactures has increased faster than that of farms. 
The investment of capital in agriculture has not gone so far that its 
interest and maintenance constitute the main elements in the cost of 
food production. The theory of normal price, under these circum- 
stances, is a hindrance. But we may still rely on competition to pro- 
tect consumers, and do no injustice to the producers. Sec. 165. 

The extreme economy of large production tends to make prices 
oscillate, by tending to create an oversupply which would lower 
prices. Sec. 166. 

The failure to reach a staple price leads to combination. Sec. 167. 

Combinations are economical both to the individual producers and 
to the public. This is especially true of distributive services. 
Sec. 168. 



16 

The " combine " system is often poor, on account of the unscrupu- 
lousness of its members. The public is best served by a one price 
system such as a " combine " inaugurates. Sec. 169. 

Many bona fide " combines " are broken down by selfish con- 
sumers. Sec. 170. 

Pools take three forms, (i) Division of the field. (2) Division 
of the traffic. If the state affairs is such that one course is weaker 
than the other a differential rate is given to the weaker concern, 
which shall attract trade its way sufficiently to make the divisions 
equal. (3) Division of the earnings. The two latter systems are 
very good. Both are productive of mutual trust. All three prevent 
cutthroat competition. Sec. 171. 

In the United States pools are illegal. To obviate this the joint 
counting rooms take the form of clearing houses. When the 
majority of stock of each company is put in the hands of a common 
board of trustees, there is said to be a trust. The stockholders, 
who have given their stock to the trustees, lose their vote. They 
receive their earnings. Consolidation is possible, but it is taxed on 
the whole property in each state. The prevention of consolidation 
led to combination. The advantages of industrial combination are 
often overbalanced by the evils of commercial combination. The 
economy of combination is somewhat offset by the loss of stimulus 
which competition alone seems able to give. Sec. 173. 

Boycotting of rival companies by combinations is bad. Non-re- 
striction of charges is a shortsighted policy. Sec. 174. 

A corner may force prices and make money for a short time. The 
real gains are, however, less than the apparent ones. Sec. 175. 

If the article consumed is sold directly to consumers, the com- 
merce will be unsuccessful, because the demand will decrease. If 
an intermediary has contracted to supply the article to the consumer, 
the corner will be more successful. It pays to sell cheap with small 
profits. Sec. 176. 

Low prices with low profits do not invite competition. Sec. 177. 

Often a monopoly is governed indirectly in its charges. A railroad 
must fix its rates so as to permit transportation. Sec. 178. 

There are few cases when the monopoly of the sources of supply 
is so complete that even the possibility of indirect competition is 
absent. It is far more profitable to have low charges and small 
profits. Sec. 179. 

The evils of a shortsighted policy leads to the demand that the 



17 

government should control it. But worse results would follow from 
this than before. Sec. 182. 

There are three methods of regulating such industries, (i) Limi- 
tation of profits. (2) Fixing of rates by public authority. (3) En- 
forcement of farsighted methods of management. Sec. 183. 

A limitation of profits would remove the incentive to get maximum 
profits which are gained at the same time that the public is best 
served — that is when the business is large and the profits small. It 
also prevents the investment of capital, which is the best guarantee 
for the protection of efficient public service. It does not foster new 
methods and inventions, because it takes away the possibility of 
special profit. Besides a legal limitation is easily got around: (i) 
By extravagance of management and salaries : (2) Stock watering. 
The evil of this is far worse than that of unlimited profit. Sects. 
185-187. 

The limitation of rates is much better, but it has these objections : 
(i) It is hard for the manufacturers to determine the cost of pro- 
ducts. It depends so much on quantity. (2) It is much harder for 
the government to determine rates justly. The depreciation in the 
value of stock, and the fluctuation of the cost of materials interfere 
with a just legal fixing of rates. Sects. 187-188. 

Trivate companies fix a rate for maximum profit. This is the 
point, as we have seen, of greatest advantage to the public. The 
government would not be able to fix the rate so well, because it is 
not interested like the private company. In many kinds of business 
the company itself don't know how to fix rates. In many cases 
they are very variable, as in the case of bye products. The govern- 
ment cannot manage affairs so well as the company, because the 
self-interest of the company leads it to make maximum profits. 
Maximum profits are accompanied by the best public service. 
Although the laws might be efficient, their operation is, in almost 
every case, unsatisfactory. Sects. 189-194. 

New industries need legal regulation, because they have not had 
the experience which teaches them that they serve themselves best 
by serving the public best. If the attempts to prescribe rates is 
unsatisfactory the managers will lay their own shortcomings all on 
the government. This retards the educational process. Sects. 
195-196. 

Court arbitration is less useful because of the increasing compli- 
cation of human affairs. Sec. 196. 



18 

Commissioners are often good, but they increasingly depend on 
authority. Advisory boards are also good. Sec. 197. 

Publicity of rates is useful. General legal principles are better 
than special statutes. Sec. 198. 

The directors should be made more responsible. Sects. 199-200. 

CHAPTER VII. 

Money is a basis of commercial obligations. It serves two pur- 
poses : (i) Cash reserve. (2) Medium of exchange. There must 
be a cash reserve to secure solvency. Sects. 201-202. 

A basis of contracts not based on a medium of exchange is money 
of account. Sec. 203. 

It is necessary that money be homogeneous and invariably accept- 
able. One kind must not be worth more than another. Sects. 
204-205. 

Metals are used for coinage because their value is less liable to 
fluctuations due to the current production in one year. They are 
permanent and homogeneous. Sec. 206. 

The choice of metal depends largely on the cost of production. 
It also depends on its scarcity, e. g., platinum in Russia. Sec. 207. 

Coinage is the process of stamping a piece of metal certifying its 
weight and fineness. Coins are milled, stamped on both sides and 
returned, when old, to prevent the operations of the counterfeiter 
and sweater. The sweater rubs off some of the metal and makes a 
new coin look like a much worn one. Sec. 208. 

The declaration of legal tender must be with the accord of the^ 
property holders, else no one will accept it. Sec. 209. 

The superior execution of the coinage which seignorage makes 
possible, is of far more value than the slight increase in elasticity 
which free coinage affords. Sec. 210. 

The charge which the government makes for coinage is called 
seignorage. This is generally charged on subsidiary coin. Subsidi- 
ary coin is not worth its face value. Usually it is not legal tender. 
When seignorage is abstracted from legal tender it is called debase- 
ment. Sec. 211. 

Gresham's law is that a relatively small increase to the currency 
with debased currency, decreases the amount of good money in 
circulation by nearly the same amount. Sec. 212. 

When the debased currency replaces the good by more than a 



19 

little its value falls ; this process is called inflation. The result is 
depreciation. Debasement usually results in depreciation, because 
the motive to expand the debased currency is large. The govern- 
ment is tempted to coin the seignorage. Sec. 213. 

Paper money is useful on account of convenience. There are 
three forms: (i) Coin or bullion certificates. (2) Redeemable 
paper. (3) Irredeemable paper. The bullion certificates are 
secured dollar for dollar. Redeemable paper are not founded on 
actual reserve, but on the assets of the treasury. There is the 
danger that these will, in an emergency, be converted into inconvert- 
ible paper. This is likely in an excess to be discredited. It is 
likely to be issued in excess. The evils are obvious in contracts. 
Sec. 2r4. 

There are, besides these, bank notes. The sum total of all these 
comprises the currency. Bank checks are part of the currency. 
Sec. 215. 

The value of money is measured by the quantity of other things 
which a unit will purchase. It varies inversely with the level of 
prices. A method of determining the value of prices has been 
found by the weighted average of prices, and by the relative amounts 
used in an average family. Both these are worked out for a number 
of years. The results are quite the same. Sects. 215-216. 

The index numbers thus formed do not indicate the enjoyment 
gained in spending money, because: (i) They deal with products 
alone. They do not take into account rent, wages and services 
rendered. (2) They deal with wholesale prices and not retail 
which do not correspond. For this reason the index is distorted. 
(3) They are based on wholesale prices nearest the point of con- 
sumption. Cheap transportation affects these prices. All these 
causes tend to make the gain to the consumer, and the loss to the 
producer, from the observed fall, much less than a superficial view 
of the index would lead people to infer. Sec. 217. 

The amount of money times the circulation is equal to all the 
business done. This is equal to the prices times the transactions. 
R — rapidity of circulation. M — money. P — price. T — transac- 
tions. RxM— PxT. If R is proportionate to T, M is proportionate 
to P. Sec. 218. 

In this system, changes in the quantity of money are at once a 
cause and an effect of changes of general price level. There is less 
error in regarding the changes as effects. The amount of production 



20 

of gold is so far affected by changes in the price level, that it tends 
to adapt the supply to the demand, and thus mitigates changes 
more than it causes them. Sec. 219. 

Under free coinage gold is withdrawn from the arts or currency as 
its value is greater in the arts or currency. Sec. 220. 

Every individual must have a cash reserve. If a nation does no 
banking business, each individual must hold a relatively great 
reserve. A man must have some cash reserve. It is reduced if he 
has deposited his money in the bank, for his reserve is the bank's 
reserve. This is smaller in proportion. A nation's demand for 
money is the sum of cash reserves which its individual members 
deem necessary for their maximum profit. The higher the price 
level the greater will be the amount of money which has to be held 
as reserve. Sec. 221. 

If there is a temporary deficiency of the money reserve, there will 
be a demand for short time loans at high interest. If this lasts long 
men will sell goods and securities in order to get gold. Prices will 
go down. Gold will go up. This attracts gold from other countries, 
and from the arts. Under free coinage the gold will so increase 
that its value will go down, with respect to commodities. Prices 
will go up again. The converse case of excess of money shows 
corresponding effects. Sec. 222. 

The supply and demand of gold money are in equilibrium, when 
the value of coin equals the value in the arts ; when the marginal 
utility of an ounce of gold used in the arts is exactly equal to the 
marginal utility of the goods which it will purchase at current prices 
when used as money. Sects. 223-224. 

The marginal utUity as gold bullion must be equal to the marginal 
utility of any of the various articles the money coined from such 
bullion would purchase. This may be represented by a diagram. If 
gold were used in the arts alone, the nominal price would be when 
the curve of the demand for gold cuts the curve of the supply of 
gold. If the gold is used both for money and the arts, more gold 
will be needed than before. Therefore, to the curve of the amount 
of gold which is demanded in the arts must be added the amount of 
gold which currency demands. This brings the price of gold up. 
Sec. 226. 

The present scarcity of gold is adjusting itself by increasing the 
supply. Sec. 227. 

In the case of money which is increased in amount at increased 



21 

cost, we have a double equilibrium: (i) Between the marginal 
utility of the bullion used in the arts, and the marginal utility of the 
commodities purchased by coin of corresponding weight. (2) Be- 
tween the cost of production of such bullion, and the cost of the 
production of the articles for which a corresponding amount of 
coined money is exchanged. The changes in the value of gold are 
bound to be slow enough to allow people to readjust contracts. 
Sec. 228. 

Money fluctuates in both quantity and value. Sec. 229. 

A tabular standard has been devised to ascertain the fluctuations. 
Contracts would be payable in coin, but the amount would depend 
on the price level when the payments became due. When the 
index number rose the amount paid should be larger. In the reverse 
case it should be smaller. This has two objections: (i) It is unfair 
to set any fixed tables of commodities as a basis for the construction 
of such a table. (2) There is no authority to do this except the 
treasury department. In emergencies it would be difficult to trust to 
its impartiality. Sec. 230. 

If there are two kinds of money, one of which is worth more than 
the other, the debtor will pay in the cheaper metal, and the creditor 
will want the dearer metal in the absence of a tabular standard. 
Sec. 231. 

Bimetallism is the policy of allowing free coinage of more than 
one metal. This keeps both metals in convenient and alternating 
use. Sec. 232. 

Bimetallism diminishes the chance of fluctuations in the value of 
money. It does not permit appreciation as does monometallism. 
A slowly depreciating currency is better than a slowly appreciating 
one. It is better for the debtor, and also tends to prevent an over 
supply of capital, and its consequent rash investment. These are 
the arguments of the bimetallist. .Sects. 233-236. 

Gold has not appreciated so much as the bimetallist asserts. 
Prices have not gone down universally. Many things have risen in 
price. This shows that gold has not appreciated much. .Sec. 236. 

Besides, as prices have fallen, interest has decreased. In times of 
advancing prices, the loss of the creditor was offset by an increase 
in the interest rate. Most of the contracts for the payment of 
interest were of short enough duration to enable the creditor to 
indemnify himself for any probable loss of his principle by increased 
interest charges. Although there is injustice it is less than would 
appear from looking at the figures of prices alone. Sec. 287. 



22 

Labor bears a very constant ratio to gold. This prevents much 
injustice. If the laborer earns about the same amount of real 
wages, there is no injustice, because he will be able, with real wages, 
to do as much as before. Sec. 238. 

Silver has depreciated much more than gold. This would have 
made a system of bimetallism more fluctuating. Sec. 239. 

The evil secondary results of quick inflation are not avoided by a 
slow continuous process of depreciation. While prices advance 
speculators come into the control of business by offering high rates 
which they cannot pay unless the depreciation is continued. Over 
production of machinery results. Sec. 240. 

Bimetallism is impracticable. It is attempted under three con- 
ditions : 

(i) If the ratio between gold and silver is the market ratio 
of price, a slight fluctuation would make one dear and one cheap 
metal, both of which would be legal. 

(2) If the ratio were near the market ratio, the mints might 
begin to operate and make the ratio correspond to their bullion 
value. This might happen on account of ignorance ; no one could 
tell what would happen. In order to support this the nation would 
have to take silver enough to keep the gold in circulation. A large 
amount of silver would drive the gold out of circulation. No 
nation could keep this operation up. 

(3) When the ratio is far from the market ratio, the result will 
tend to be monometallism. Sects. 241-242. 

France had bimetallism under good conditions. It degenerated 
into gold and subsidiary silver coins, because of the discovery of 
gold in California and Australia. She could not support her silver, 
but simply had to make it subsidiary on account of the rise in price. 

The United States went through the same series. Sec. 244. 

The Bland Act (1878) secured the coinage of $2,000,000 worth of 
silver per month. The government kept the seignorage. This was 
all right, because the country was growing and could absorb the cur- 
rency. Sec. 245. 

The Sherman Act (1890) provided for the purchase of four and a 
half millions ounces of silver a month, by an issue of treasury notes, 
equal in amount to the bullion purchased. This sent the price up. 
Two mines were opened and the prices were again lowered. The 
government could not buy the silver ; gold was all spent, and relief 
was only obtained by the repeal of the Act, This proved the ineffi- 
ciency of bimetallism for the United States. Sec. 246. 



23 

There are four plans proposed to replace monometallism : 
(i) A bimetallism on shifting rates. This is bad, because of its 
liability to mismanagement. If an attempt were made to regulate 
these matters by international agreement, the friction attendant on 
such would be great. 

(2) Large coinage of silver by a number of nations, limited, how- 
ever, so as to drive out the gold. This forces nations to carry much 
silver coin. The people might not agree to this. If they did not 
the nations would have to carry still more silver. 

(3) Bimetallism provides a currency which consists of a certain 
weight of both metals combined. This is possible to abuse by the 
government. 

(4) P'ree and unlimited coinage of silver at 16 to i. Under this 
the currency would be exposed to the changes of silver production. 
Besides, this would be inconvenient in foreign exchange. Such a 
currency as this would not be universally acceptable, perhaps. This 
would raise interest. It would scale down debts. Any gain to the 
debtor would be offset by the difficulty of borrowing. Sects. 247- 
250. 

An issue of legal tender notes without reserve has been contem- 
plated. Three motives combine to cause unwise and spasmodic in 
flation of paper money of this kind : 

(i) A fiscal motive; to issue money to meet expenses. (2) Con- 
stant pressure of the debtor class for an increased volume of legal 
tender money. (3) A general popularity of such issues. Sec. 251. 

Inflation may cause temporary ease, but it has its secondary effects. 
Sec. 252. 

The reason for this superficial view is that the borrower wants 
money and he thinks the larger the currency the easier to get money. 
What he really wants is capital. No increase in the currency will 
increase capital. Interest will rise because lenders will fear that the 
government will increase the currency again. To secure themselves 
they charge a higher rate. Sec. 253. 

Inflation of the currency causes a temporary inflation of business. 
Then ensues depression, the proportion of legitimate transactions 
diminishes under these circumstances, and gambling increases, be- 
cause there is less security and more chance in business. The 
tendency is to raise prices faster than money. This hurts the 
laborers. The scaling down of debts does more harm than good to 
the laborers. Sec. 255. 



24 



CHAPTER VIII. 

If capital is scarce the community try to use credit instead of 
money. Sec. 256. 

This is thought to be a sign of progress. The tendency is to 
increase the use of cash. Sec. 257. 

The pressure to use credit and little money is felt in two distinct 
cases, (i) In poor communities people keep too little cash reserve 
This results in high credit prices, low level of prices for cash, and 
an uncertain commercial system. (2) In very active communities 
the people in their eagerness invest all their wealth to increase, 
their wealth in the future. Sec. 258. 

A system of credit is worked out by checks on the bank. The 
necessity for actual payments is diminished by letting the account 
run from month to month. Sec. 260. 

The Clearing House may be used for checks on banks not in the 
same place. Sec. 263. 

Domestic exchange is the difference in money values of checks on 
banks from different parts of the country. This difference may 
equal the cost of shipment of bullion. The bank, with regular de- 
positors, pays the loss. Sec. 263. 

In foreign exchange the cost of shipment is greater, giving a wider 
margin of profit and loss. The business of foreign exchange is 
unlike domestic exchange in that it is used as a source of income. 
Sec. 264. 

When exchange is most favorable it is at $ 4.83. When most un- 
favorable it is at $ 4.89. It will hardly exceed these since the bul- 
lion would be transported at a higher rate. Sec. 265. 

The limits of variation in foreign exchange are largely affected by 
the rate of discount in both countries. Sec. 266. 

Bills of exchange are sold ahead of time. The buyer may reap a 
profit by prophesying which way exchange will run when the bill is 
due. It would be economical if we could stall the constant flow of 
gold by giving and receiving rights of money instead of sending it 
across. Sec. 267. 

It is not necessajy to receive money from the country to which 
we sent it. We may receive it from any where. Sec. 268. 

This credit system, by which less bullion actually flows than would 
flow if we settled separately with each country, has two advantages. 
I. It avoids the risk of actual transmission. 2. It saves the wear 



25 

on metallic money and saves the interest on the capital which would 
be represented by so much coin. The money which is thus saved 
may be used for investment which would yield a profit besides that 
already gained from exchange. Sec. 269. 

The amount of reserves depends on the kind of business the bank 
does. The city bank has 25 per cent, while the country bank has 
only fifteen per cent. Sec. 270. 

Commercial banks have many of their investments in discounted 
commercial paper. Sec. 271. 

When parties draw accommodation paper — accepted bills on the 
basis of fictitious transportation — the bank refuses to do business 
with them. Sec. 272. 

Banking does the same service that speculating does. It allows 
the stock of money to be better utilized and insures credit. The use 
of bank deposit gives elasticity to the currency. Sec. 273. 

If it is easy to get accommodation at the bank, prices rise. This 
goes on until the liabilities become disproportionate to the reserves. 
When the public perceives this, accommodation is withdrawn. This 
causes greater distress than would have resulted had the facilities of 
payment by credit been less elastic. Sec. 274. 

This danger is greater when credit takes the form of bank notes 
instead of checks. The credit of the bank notes is outstanding for 
a long time. The inflation is apt to be too large and the reserve too 
small. Sec. 275. 

As prices rise, the notes are increased. This continues until there 
is some shock to the confidence of the people, such as may be 
caused by a bank failure. Sec. 276. 

Bank note inflation may be stopped before a crisis comes. When 
inflation is weak, the movement of coin may give warning. Sec. 277. 

No method of banking will avoid these evils. All banks tend to 
inflate at the same time. The local character of the currency may 
prove an actual advantage. Pride or custom may prevent people 
from redemption of notes. This tends to let the notes circulate 
freely. Sec. 278. 

Centralized control of banking and note issues has worked better. 
But that is not eminently successful. Sec. 279. 

The choice between one great bank and many small ones has been 
political, not economic. Sec. 280. 

Sir Robert Peel's Act of 1884, to compel the volume of currency 
depend on coin and bullion was, for the most part, good. Sec. 218. 



26 

In Scotland and Canada the notes are convertible. Sec. 282. 

The Bank of France is not governed by legislation as to the 
amount of its note issues. It has issued its notes wisely. Sec. 283. 

In Germany one-third of the issue must be protected by coin. If 
the difference between the reserve and the issue exceeds $70,000,000 
an annual tax of 5 per cent, is levied on the excess. More stress is 
laid on supervision than on specific instructions. Sec. 279. 

A United States bank was established twice, chiefly to help the 
government. It did not prevent the issue of notes by state banks. 
Both times it expired, but the issues of notes by state banks con- 
tinued until the Civil War. Sec. 285. 

In Massachusetts a number of banks established a common agency 
for the redemption of notes, to prevent irresponsible issues. In 
New York, a law compelled banks to hold United States bonds, 
state securities, or real estate mortgages to the amount of the notes 
issued, and to deposit them with the state treasurer as a pledge of 
redemption. Sec, 286. 

During the war a tax of ten per cent, was levied on State Bank 
notes in order to place the government notes. State Banks then 
became national. They deposited one-third of their capital in United 
States bonds in the Treasury, and on this they could issue 90 per 
cent, of the face value of the bonds. The price of bonds later rose, 
so that the maintenance of the circulation was unprofitable, and a 
large amount was surrendered. Sec. 287. 

It is urged that the financial systems of both the United States 
and England are based on no economic law, but on a somewhat 
arbitrary principle. In England, the circulation is increased by sus- 
pending Sir Robert Peel's Act of 1844. Ii^ the United States the 
circulation is increased by the issue of clearing house loan certifi- 
cates. These certificates are allowed the members of the New York 
Clearing House Association in return for deposits of securities, 75 
per cent, of their par value. At the Clearing House they are ac- 
cepted in lieu of cash payments. This, of course, sets free so much 
extra cash. Sec. 288. 

The bank notes should not equal the wants of business in ordinary 
times. It should not be so elastic that in times of emergency it will 
not take additional strain. Sec. 289. 

Some think the government should take into its hands the issue 
of notes. They urge that it would be a profit to the treasury and a 
protection to the people. Sec. 290. 



27 

Much of the profit is more apparent than real. The proof is that 
some banks have given up the circulation of notes. If the govern- 
ment took it, its credit would diminish, and the rate of interest on 
the debt would increase. This would counter-balance all the gain 
Sec. 291. 

The treasury is not well fitted for a banking business. It has no 
means of swelling or shrinking the currency. A bank may use its 
assets for this. The government cannot, because quick inflation 
will ensue. Besides, the assets of the government furnish no indi- 
cation of the volume of the currency needed. Sec. 292. 

The Farmers' Alliance wants the government to issue notes on 
the basis of products entrusted to the government ; the notes to be 
retired as soon as the products are withdrawn, and the proportion 
of such notes to the value of the product deposited to be kept low 
enough to ensure the government against loss and stimulate the 
owner to sell goods as soon as possible. Such a plan would do 
little good or harm if it were properly carried out. If safe action on 
the part of the government does not make the currency larger than 
it is with safe action on the part of the banks, the whole reason of 
the scheme falls through. It involves the existence of a system of 
governmental machinery which, with slight changes in the law, 
could be made to inflate the currency under the guise of promoting 
credit. This would be a perpetual menace to the stability of the 
country. Sec. 293. 

CHAPTER IX. 

More than normal profits in any business attracts capitalists to it. 
This will increase the demand for labor and wages will rise. 
Sec. 295. 

The rate of profit is extremely variable, due (i) to the difference 
of time production (2) to superior foresight. Sec. 296. 

Payment for capital is interest. Payment for location is rent. 
Sec. 297. 

Interest is not a natural return independent of skill in investment. 
There is a conformity between the borrower's estimate for the future 
and the actual experience of the past. Sec. 298. 

The system of interest was approved because it increased public 
wealth. The rate of interest is detrimental by the skill of the in- 
vestor. Sec. 299. 



28 

The rate of interest depends on the law of demand and supply of 
loanable funds. It is paid for the control of capital. It represents 
commuted profit. Sec. 300. 

The rate of interest is a competitive rate of commutation. It 
tends to a point where the demand for capital, on the part of those 
who think their profit will exceed that rate, equals the supply fur- 
nished by those who think their profit will not exceed that rate. 
Sec. 301. 

In point of fact the interest is a little below this point. The 
lender is willing to let his capital a little cheaper in order to lose the 
care of it. Sec. 302. 

There are two sources of capital. One is the business men who 
might be borrowers instead of lenders. The other is the people who 
insure themselves, by lending, a steady return in the future. The 
amount of the first kind of capital varies. The capital from the 
latter source does not vary with the rate offered. It would be 
better to say the rate varied with the amount offered. Sec. 303. 

The amounts of capital which people are willing to convert into 
income (interest) correspond to the amounts of income people 
are willing to convert into capital. Sec. 304. 

The general fund of loanable capital owned by people who wish 
neither capital nor risk tends to equalize interest rates in different 
lines. Sec. 305. 

This process is never fully accomplished, partly for lack of time, 
chiefly to lack of knowledge. It takes a long time for the public to 
find out where profits are really highest and to transfer their income 
to them in amounts sufficient to reduce the rate of profit to the 
general level. Sec. 306. 

There is a general rate of interest fixed by demand and supply. 
This is influenced in three ways : by changes in the money supply, 
by changes in the supply of products, and by changes in the degree 
of economical security. The effects of the first are trifling as com- 
pared to the last. Sec. 307. 

The rate of interest is not lowered by an increase in the currency. 
The resulting insecurity of such an inflation really tends to raise it 
higher. But if the currency is increased through the banks as loan- 
able funds, the interest will be lowered. This must be immediately 
retired in order to prevent the subsequent rise which would follow 
the increased speculation and increased security which such excess 
of currency engenders. Sec. 308. 



29 

The idea that the rate of interest can be lowered by increasing the 
supply of products is a fallacy. If capital is increased interest will 
fall. The value of each product has decreased with the interest, due 
tolthe great supply of products, so that the ratio of the lower inter- 
est to the lower value is just about the same as the old rate of 
interest. Sec. 8io. 

The rate of interest is influenced more by the degree of security 
than value of money products. The best guarantee of security is 
given by the character of the capitalists. The clearest evidence of 
this is to be found in conservative government. Sec. 311. 

Risk is incident to progress. So far as insecurity results from 
activity in industrial enterprise rather than from lack of enforce- 
ment of laws, it is good. Sec. 312. 

The tendency of profits and of interests to fall as security ad- 
vances has been overestimated. The high rate of profit in new 
countries is more apparent than real. The new country offers more 
fields of exceptional profit, but it involves more risk. This idea 
is due to the glowing reports of the new country and to the promi- 
nence of the few cases of exceptional profit. .Sec. 313. 

The rate of interest tends to fall. But it does not fall so much as 
it is commonly thought. As society becomes more secure there are 
fewer cases of high nominal interest on risky contracts and invest- 
ments which make it seem as if the interest had fallen from a greater 
height than it really has. Sec. 314. 

There still is difference in the real rate, which is due to the follow- 
ing : 

1. In new communities there is an insecurity of tenure and a 
chance for adverse legislation which make future rights less valuable. 

2. The high rate of fake interest attracts into illegitimate invest- 
ments a certain amount of capital which would otherwise be used in 
legitimate ones. This lowers the supply for the legitimate invest- 
ments and raises the rate. 

3. In new countries people want to control their own capital. 
This raises the rate by decreasing the supply of loanable funds. 
Sec. 315. 

The rate of profits seeks a level, because as interest goes down 
while profit remains stationary, the borrowers invest more. This 
creates a demand for labor. Wages rise. More products result. 
Prices go down and profits go down. Sec. 316. 

There are two causes which make this adjustment incomplete. 



30 

I. When all the business men in one industry combine to prevent 
an increase of investment. 2. When each man acts separately and 
competes with others, but where some have advantages of method 
or location over the others. Both may be called monopoly. In the 
second case the one has a differential advantage over the others. 
Sec. 317. 

Exceptional profits of a true monopoly are generally transient. If 
they are due to a patent, it expires. Rival processes fear of 
public opinion and legislation reduce them. Sec. 318. 

We see differential gains if the demand for the products of indus- 
try is too large to be met by a single organized source of supply. 
Sec. 319. 

When individual gains are personal (that is, due to individual 
capacity), they are known as net profits. When they are due to ad- 
vantages of location they are known as economic rent. Economic 
rent is generally due to foresight in investment. Net profit is due 
to skill in management. Sec. 320. 

Commercial rent is the price paid for the use of the land and its 
improvements. A large part of this is interest. Commercial rent 
must not be confounded with economic rent. Sec. 321. 

Economic rent and net profit resemble producers' and consumers' 
gains in being differential gains. They are unlike them in being 
habitually measured in money and, therefore, more observable ; and, 
second, they are offset by differential losses which often more than 
neutralize the gains. Economic rent and net profits are really com- 
pensations for risk. This justifies the private ownership of property 
and the present industrial system. Sec. 322. 

Profits are the charges which the capitalists make for insuring 
I society against the loss incident to industrial experiments. Sec. 323. 
\ ' The prevailing theory of ecenomic rent ignores the extent of these 
losses. It assumes that future prices can be foreseen, and that 
the marginal laborer and the marginal unit of capital do contribute 
to an amount equal to the valuation of their services. This is not 
true. The marginal laborer is employed at wages which exceed the 
total amount that the consumer ever pays for the product of his 
labor. The marginal unit of capital receives a return in the form 
of interest which is often in excess of the advantage which the 
speculator gets from its use. If the product of the laborer and 
capital were immediately available for consumption, such mistakes 
would not be made. The number of these errors is very great. 
Sec. 324. 



31 

Ricardo thought that, if for any reason profits were low, the capi- 
tal would be immediately withdrawn, for two reasons : In his day 
there were no great companies which can't get tiieir capital out, once 
it is in a business. He was a banker and landlord. He was ac- 
quainted with investments that could be easily transferred. Today 
there is much fi.xed capital. The returns to labor are distant. A 
thing once made cannot be unmade without great sacrifice. The 
positive rent and positive profits are counter-balanced by losses, 
both on real estate and personal property, which perhaps are greater 
than the aggregate amount of differential gains made by the more 
successful inventors. Sec. 325. 

Four circumstances may cause sucli loss. i. Technical failure. 
The capital does not yield expected result. 2. Industrial progress. 
The investment of capital in an industry is replaced by a belter one 
before the accumulated profits have paid the original cost. 3. Over 
competition. This makes low prices and low profits. 4. Contrac- 
tion of credit. This lowers prices and makes investment unreniu- 
nerative, even though it be otherwise perfectly adapted to the needs 
of society. Sec. 326. 

Technical failure is the least important cause. Sec. 327. 
The losses from industrial progress are less evident but more 
widespread. Few make allowances for the danger of the introduc- 
tion of new processes in determining the depreciation of stock. It 
represents a great reduction in the profits earned by the owners of 
fixed capital as a class. Sec. 328. 

Land owners are not exempt from these losses. They are likely to 
lose all tlieir fixed capital as industry progresses. Sec. 329. 

Over-production means that more goods are produced than can be 
consumed at the prices which cover the expense to the producers. 
Sec. 330. 

This will take place in any industry involving large fixed capital. 
When it occurs in only one line it is called disproportionate produc- 
tion. Over-production is more often due to a collapse of demand in 
a number of lines simultaneously. Such a contraction is the central 
figure of a crisis. Sec. 331. 

If the banks are compelled to reduce the accommodation of credit, 
the men who wish to pay money cannot pay as much, and the men 
who wish to receive money cannot oljtain as much. This decreases 
the volume of business by decreasing the effective circulation of 
money. Transactions must decrease in number or prices must fall* 



32 

Both singly cause a crisis. A fall in price prevents the fulfillment of 
contracts. A fall in the number of transactions prevents some from 
getting what they used or consumed and selling their surplus to pro- 
ducers. Here is congestion in trade and apparent over-production 
Sec. 332. 

The order of events of a crisis is this : 

1 . The shock to public confidence in a period of liberal, not to 
Bay, inflated credit, creates a demand for money. 

2. This increases the interest. To raise money people sell their 
goods at a sacrifice. The fall of prices is further increased, because 
those who would buy can't borrow the money easily. 

3. The fall of prices lowers profits. This makes it impossible to 
pay interest, notes, etc. Readjustments and foreclosures follow. 
The loss falls on the borrowers if the security is good. If it is de- 
lusive, they assent to a reduction of the interest. 

4. When the interest contracts have been readjusted the chief 
effect on wages begins to be felt. During the early stages of the 
crisis the employer wanted his laborers to make products. After 
the readjustment the demand for labor diminishes and wages fall. 
Soon the laborers strike. This is the beginning of the end. 
Sec. 333. 

Strikes do not help those who try to depress the price of securities. 
The strikes cut down the number of producers, so that the com- 
peting producers can dispose of their products easily. Strikes indi- 
cate that interest contracts have been adjusted to the prevailing 
price conditions, and that speculators can make arrangements for 
the future, with the assurance that the marginal price charged by 
labor and capital do not exceed the market price which the con- 
sumers are likely to pay for the results of such service. Sec. 333. 

Until this process is substantially complete the price which con- 
sumers pay for products is less than the marginal expense of those 
products — including, as we must, a return on capital invested. 
Sec. 334. 

The competition of capitalists leads them to advance wages, which 
are equal to the expected price of the product. Any excess consti- 
tutes profits. Sec. 335. 

The income for the use of capital is guaranteed, not advanced. 
This is interest. The remaining profit is either net profit or econo- 
mic rent. To separate them is to divide the reward for waiting from 
the reward for risk and foresight. Wages are advanced and guaran- 



33 

teed. Interest is not advanced but guaranteed. The justice of the 
charge made for such guarantees is justified, because society finds 
itself best served by them. Sec. 335. 

CHAPTER X. 

Wages are the discounted product of industry. The expected 
value of the product, less the discount, gives the labor cost per unit 
of product, or piece wage. This times the number of pieces per 
day constitute the day's earnings or nominal wage. The amount of 
commodities represented by the nominal wage is the real wage. 
Nominal wages and real wages should be estimated by the year 
rather than by the day. Sec. 336. 

The system of wages by time or piece is determined by the nature 
of the work. Sec. 337. 

Differences in the rate of wages among producers are due far more 
to variations in efficiency than to variations in piece wages. Com- 
petition makes this. Sec. 338. 

There are two exceptions possible. 

1. When different competitors use different methods, interest may 
take a larger share of the return, thus leaving an unequal return for 
labor. 

2. When the operation of low-cost labor is restricted to land of 
exceptional advantage or otherwise limited by monopoly, there may 
not be enough competition of capital to give the low-cost laborer 
the advantage of his superior economy. Sec. 339. 

The wages of services must correspond to what their efficiency 
would secure if they were engaged in the production of goods for 
market. Sec. 340. 

If wages fall the supply of labor diminishes, and vice versa. Sec. 

341- 

The demand for labor is measured by the piece ; the supply by 
the day. Sec. 342. 

When there is little competition there is a tendency to pay the 
laborer the minimum wage. Under this system we find — 

1. A large body of peasants producing food and receiving the 
bare necessaries of life. Diminution of labor will give this labor a 
scarcity value. 

2. A body of craftsmen who receive enough to keep their station 
and who can resist a cutting down of wages. 



34 

3- The privileged classes, controlling property and politics, who 
use surplus food unproductively. Sec. 343. 

It is the theory of most Socialists that this state of affairs prevails 
to-day. Many remedies have been offered. Sec. 344. 

The rich man benefits the poor in his productiveness by increasing 
public wealth. The spendthrift uses up the useful things. The 
miser merely hoards them. Sec 345. 

Increased production accrues to the laborers. A destruction of 
capital diverts capital from one group of laborers to another. It is 
no blessing to humanity. The wage fund is the demand, the labor- 
ing population the supply of labor, under the wage fund theory. 
The price of labor is thus fixed by demand and supply. Sec. 346. 

MacCulloch's definition of capital, as composing all products em- 
ployed for sustenance or facilitation of production, is inadequate. 
Not all the things that may be employed for this are thus used. 
The amount of capital used bears no fixed proportion to the pro- 
ducts that might be used. Laborers are better off when there is a 
small surplus of products effectively used than when a large 
surplus is ineffectively used. Wages are a flow and not a fund. 
Sec. 348. 

This fact is seen in new countries which have recently suffered 
from a war or a crisis. The capital in these cases is the same, yet 
the wages are higher than before. Sec. 349. 

Industry is not accurately limited by capital, when limited means 
that the first habitually comes up to the second and that it cannot 
exceed it. Sec. 350. 

Wages are the residual share of the product of industry. This is 
true of industry, as a whole, in the long run. Sec. 351. 

This explains high wages, where labor is efBcient. It makes 
them depend on a flow of capital rather than on a fund. Part of 
the gain from low profits goes to the laborer. All of the gain from 
low wages goes to the consumers. Sec. 352. 

Since most improvements are in manufactured articles, the gain is 
mostly the laborer's. Sec. 353. 

An improvement in production does not affect the consumption of 
the rich, but it does affect that of the poor. Sec. 354. 

Four possibilities are now open to the laborer. 

1. He may increase his numbers. 

2. He may shorten his hours of labor. 

3. He may enlarge his consumption of products. 



35 

4. He may save the excess of products due to increased efficiency 
in production. Sec. 355. 

The laborer will ordinarily work until the satisfaction nearly 
equals the pain. Sec. 356. 

While Webster's law, that increased consumption yields dimin- 
ished satisfaction applied in some measure, the rapidity of diminu- 
tion is different with the four cases of food, comforts, luxuries, 
and social advancements. With food the diminution is rapid ; com- 
forts less ; luxuries still less ; expenditures for social advancement 
are accompanied with almost undiminished enjoyment. Sec. 357. 

If a man gets the same food in three hours instead of five, he will 
spend the extra two hours on luxuries and social advancement. 
Sec. 358. 

The greater the wages the smaller the percentage for food, is 
Engel's law. An increase in food products is accompanied by a de- 
crease in price more than corresponding to the increase in the sup- 
ply. In manufactured articles of luxury an increase in the supply 
is accompanied by less than a corresponding fall in price. A 
moderate reduction in transportation rates increases the net income 
of the company. This shows that consumers when they can obtain 
more products for the same amount of labor, increase their con- 
sumption so as to devote more labor instead of less to procuring 
products of this kind. Sec. 359. 

An increase in real wages generally decreases the hours of labor. 
The low-grade labor stops working through sheer laziness. The 
high-grade labor works a little less so as to get more time for enjoy- 
ment and get more pay besides. Sec. 360. 

Sometimes the gain to the laborers is accompanied by a loss due 
to the increase in numbers. Sec. 361. 

Well-paid labor pays with increased efficiency. Sec. 362-363. 

An influx of labor often raises the labor a step above the lowest. 
The new labor does the low work. Every increase increases the 
supply and lowers the demand. Sec. 365. 

The general standard of consumption determines whether a 
country be rich or poor. A high standard of living is gained by 
high wages. Sec. 366. 

High standard of living is accompanied by a higher standard 
morally. This is good for the country. Sec. 367. 

Education and restriction of the liquor traffic are good. Sec. 368. 



36 



CHAPTER XI. 

Some people, who admit that the laborer gains by an increase of 
his own powers, doubt whether a similar gain is possible when the 
means of increased production are in the hands of the capitalist. 
Sec. 369. 

There are three evils charged against machinery. 

1. That it displaces a large amount of human labor, thus taking 
income from the laborers and giving it to tha employers. 

2. That when it does not drive labor out of use it employs it in 
unfavorable circumstances. 

3. That under the best conditions it makes the man a specialized 
machine instead of a broad-minded man. It deprives him of his 
independence. Sec. 370. 

The first evU is obviously untrue. Instead of making the same 
products with fewer men the fact has been that more products are 
made with the same or more men. Sec. 371. 

Atkinson has shown that in cotton, while the actual profits on the 
increased product had not increased the profits on the total capital, 
the wages per operative per year had increased 64 per cent, between 
the years 1840 and 1883. Sec. 372. 

The growing contract betwen wealth and poverty seems to indi- 
cate that the rich are growing richer and the poor are growing 
poorer. This is held to prove that the capitalists have been the 
gainers in industrial progress. Differences of accumulated wealth 
prove nothing as to the ratios of income of different classes. The 
enjoyment of different classes is measured by their expenditure, not 
by their accumulation. The most careful calculations show that^ 
side by side with the increase of accumulations and the resultant 
competition on the part of the employers for labor, the proportion 
of enjoyment which goes to labor is becoming larger, and the pro- 
portion which accrues to capital relatively smaller. The public in- 
come going to labor has steadily increased. Sec. 373. 

It is urged that, while the rate of profit has doubtless fallen, this 
fall is not proportionate to the increase in the average duration of 
the process ; and that the ratio of total profits to total wages must 
therefore have increased. The rate of profit (as distinct from the 
rate of interest) has fallen most conspiculously in large industries 
with much fixed capital. Goods are sold on narrow margins. The 
scale on which the work is done really gives publicity to the facts, 



37 

with regard to production and sale, in a way to insure more fully, 
both to laborers and consumers, the benefit of the one-price system. 
Mistaken investment in machinery tends also to reduce the gains of 
the capitalist classes to a far greater degree than any one would as- 
sume who did not make the calculation in detail. Sec. 374. 

It has been urged that the hours of labor have not been reduced 
in proportion to the increased efficiency which the new mechanical 
methods have given. Marx claims that if, in spite of the improve- 
ment the laborer continues to work ten or eleven hours for starva- 
vation wages, it shows that the result of six or seven hours has been 
quietly appropriated by the capitalist, since now the laborer can 
secure as much in four hours as he could before in twelve. 

The answer to this has been stated in the previous chapter. Gen- 
erally the laborer reduces his hours of labor a little, and uses the 
difference to make himself better off. Some laborers have increased 
their numbers and have fallen into those lines of industry, where the 
maximum economy is obtained by employing much labor at a small 
daily wage. The effect of machinery on the laboring class is not to 
be judged by its effect on those sections which, either by fault or mis- 
fortune, have placed themselves in a position to obtain the minimum 
benefit, either as producers or consumers. Sec. 375. 

In times of commercial distress great distress is found in those 
lines where there has been great duplication of machinery. This is 
due to variations in the rate of the introduction itself. In a short 
period it works its own cure. Sec. 376. 

A commercial panic stops investment in new machinery. This 
throws the laborers who make machinery out of employment. This 
checks consumption, because this large body of laborers have no 
money to spend. The lessening of the demand stops the mills, and 
there is a widespread suffering among the laborers. Sec. 377. 

This is the most serious indictment of the socialists against the 
capitalistic system of production. It depends on the variations in 
the rate of the introduction of machinery, which may be due to in- 
flation of the currency, unwise tariff legislation, and sometimes by 
the abuse of commercial credit. Sec. 378. 

The second charge against the factory system is that it displaces 
a higher grade of labor by a lower grade. Sec. 379. 

The introduction of machinery has, in point of fact, been attended 
with a diminution in the proportion of labor done by women and 
children. In the United States the proportion of men is ncreasingr 



38 



that of women is stationary, and that of children is decreasing. 
Sec. 380. 

The introduction of machinery demands less physical strength but 
more intelligent care and continuity of attention than children can 
possibly offer. Sec. 381. 

The mortality of children is high in cities, not because women 
work in factories and fail to look after their children, but to the lack 
of air and sunlight in the crowded cities. Sec. 382. 

The charge that factory life is unhealthful is difficult to discuss. 
Colonel Wright says that the trouble is not in the air of the factory 
but in that of the homes. Sec. 383. 

The moral results are not so bad as the system it superseded- 
The intemperance of manufacturing employees is due to town life 
rather than manufacturing. Drunkenness is less common among 
factory operatives than among laborers of other kinds. The factory 
system does not promote prostitution. The number of prostitutes 
coming from the ranks of factory operatives is conspicuously small. 
Sec. 384. 

The larger the factory the more concentrated the evils and the 
easier to deal with them. The factory system has not created the 
evils, but has concentrated them. It has created the opportunity of 
holding employers responsible for their prevention. Sec. 385. 

The manufacturers have done much to protect themselves and 
their employees in the way of protection from fire and accidents. 
Female and infant labor has been regulated by law much more 
effectively. The number of hours has decreased for adult men. 
Sec. 386. 

The laborer is protected by law against accidents. Sec. 387. 

It is undeniable that labor is becoming specialized, and that many 
of the occupations have a narrowing effect on those who practice 
them. Sec. 388. 

The gain in opportunities for travel and varied enjoyment has out- 
weighed the loss in opportunities for changes of occupation. Sec. 

389- 

This improvement tends to stimulate the movements toward 
combination of labor, which may seem necessary to insure the 
laborer against the loss of all industrial and social power. Sec. 390. 

The old labor guilds were organizations of capital and labor. The 
modern trade union is a combination of labor. Sec. 391. 

At the beginning of the present century public sentiment and the 



39 

law were opposed to labor organizations. To-day it is not so. Sec. 
392- 

The change in public sentiment has not kept pace with the 
changes of the law. Many believe that labor organizations exist for 
the purpose of striking and that industrial peace would be secured 
if they were suppressed. The first is a distorted idea ; the second 
is wholly unfounded. Legal proctection of labor organizations has 
made them more rational, and therefore more dangerous to those 
who resist them. Sec. 393. 

Nearly all the older trade unions are conservative responsible 
bodies, prepared to make contracts with capital as well as fight 
against it. This permanence of organization makes them reluctant 
to engage a conflict. Those unions are so exclusive and conserva- 
tive that a new unionism has sprung up which aims to look after 
labor as a whole. This is not a trade organization but a local one. 
Sec. 394. 

With new unionism, insurance and benefit systems count for little 
or nothing. They rely less on the power of the individual strikers 
and more on the collective power to influence public sentiment and 
legislation which the laborers have as a class. Sec. 395. 

The most important object is the attainment of compulsory arbi- 
tration in lieu of protracted strikes. This is a wise move. Sec. 396. 

They urge that the capitalist should serve the public continuously, 
that he should not inconvenience the public by stopping to haggle 
over a few cents wages. The court should determine the fair rate 
of wages. Sec. 397. 

This would be one-sided. The laborer would get all the advan- 
tage. It would tend to make the capitalists hesitate to invest their 
money in new enterprises. The consumer would suffer for lack of 
sources of supply. The producers would suffer from lack of fields 
of employment. The capitalist could be forced to arbitrate by boy- 
cotting. The advantage would be all the laborers. It can be en- 
forced to their advantage and not to their disadvantage If to their 
advantage industry may be checked. Sec. 398. 

If we have compulsory arbitration investment is stopped, but we 
are not liable to interruptions in the public service. If we do not 
adopt it we suffer from the interruptions of public service. Sec. 399. 

Government ownership does not meet the exigencies of the case. 
If it yields to the labor demands in every instance the want of disci- 
pline will be destructive. If it resists the demands of labor it will 



40 

have no more effective means of maintaining its ground than the 
capitalists. Sec. 400. 

As time goes on the leaders on both sides become sufficiently wise 
to reduce disputes to a minimum. Sect. 401. 

A board of conciliation at an early stage of a strike can accom- 
plish much. Often strikes are due to misunderstandings. Sect. 402. 

The division of earnings according to the selling price of the pro- 
duct, is known as the sliding system. This is agreed to before 
hand and prevents much trouble. Sect. 403. 

From the workers' standpoint this may prove serious as the selling 
price may be such as to make their income less than their needs. 
According to the living wage view, labor should be paid enough to 
maintain a good grade of efficiency. Sect. 404. 

The evils of treating labor as a commodity and not as a com- 
modity are both great. Sect. 405. 

The living wage may be good. But it is a hard thing to work. 
Some would insist on a living wage which the employer might think 
unfair. It would make a man work for something or nothing, there 
would be no intermediate steps. The consumer might be unwilling 
to pay the something and there you are. It is absolutely necessary 
that the living wage be just. Sect. 406. 

The competition of labor and the competition of capital are to-day 
very effective in gaining good results to the laborer. Sect. 407. 

Under the living wage system the laborer must resort to bargain- 
ing in which the capitalists, superior strength and intelligence must 
tell against him. Sect. 408. 

Monopolies of capital and labor are bound to fail. Sect. 409. 
Many trade unions discourage industrial efficiency. This is a 
grave tendency. It handicaps themselves as well as society. Sect. 
410. 

CHAPTER XII. 

Labor and capital are most compatible when there are no sharp 
distinctions between them. This is the state of affairs in young 
countries. Sect. 411. 

At present there is a sharp distinction. To become a capitalist 
requires large saving, this involves serious dangers. 

I. It increases strikes which involve the economic distinction of 
capital. 



41 

2. It neutralizes much of the inventive, giving advantage of pri- 
vate property. 

3. It involves a contradiction between our political theories and 
the fact of the industrial world. The warring of labor against 
capital menaces our political and industrial order. Sect. 412. 

The paternal policy on the part of the employers does not meet 
the second and third dangers. It leads to violation of the doctrine 
of social equality unless very carefully carried out. Sect. 413. 

The policy of letting the workmen take shares leads to abuse in 
large factories. It does not make the laborer independent, but 
merely helps him to elect his own governors. This amounts to 
little. Sect. 414. 

Profit sharing is not always successful although it is fairly good. 
Sect. 415. 

Usually the workmen are unwilling to heartily enter such a 
scheme. Sect. 416. 

The bonus of profit to the labor must increase his efficiency or he 
must be prepared to accept low or high wages as the business turns 
out. Sect. 417. 

Workmen cannot be forced or urged to work harder by the pros- 
pect of these distant returns. The increased efficiency of one helps 
all. This the laborer soon sees. If there is little or no profit the 
suspicions of the laborer are aroused. Sect. 418. 

If laborers are not working near their maximum rate, profit sharing 
may be good. Sect. 419. 

Under other circumstances it should be condemned as it involves 
the laborer in the risks of the employer. Sect. 420. 

It is often possible to enable the workman to gain a bonus by 
superior efficiency and care. Sect. 421. 

Co-operation is either consumptive or productive in its manage- 
ment. In the latter case it is controlled by the investors, in the 
former by the consumers. Sect. 422. 

The more completely the workman is in the habit of using his 
powers, the least promising the field for co-operation. It needs a 
field of industry that demands little management, Sect. 424. 

Lasalle wanted the government to lend capital to the co-operators. 
This would increase the likelihood of poor investments. The failure 
of co-operation is generally due to the lack of business ability of its 
managers. Sect. 425. 

Consumers co-operation is much better than the productive one. 



42 

The essential difference is that one knows the demand the other 
does not. For this reason the productive co-operation needs a very 
good manager. There are three forms of consumers co-operation, 
co-operative purchase, insurance and banking. Sect. 426. 

The first form, co-operative purchase is very successful. Sect. 427. 

This is mainly due to the cash system on which the stores are 
run. Sect. 428. 

The business is regular and needs little advertising. Sect. 429. 

Co-operative insurance prevents over insurance which is burden- 
some on the poor and leads to fraud in order to get the insurance. 
It is cheaper because there are no high salaried agents. Sect. 430. 

Mutual insurance prevents fraud and lowers the rate. Sect. 431. 

Co-operative mutual life insurance has been considerably success- 
ful. Sec. 432. 

The idea of the co-operative banking is that labor may enable 
itself to obtain credit by collecting a small capital in the hands of 
the association, shall attract outside investors by the offer of a fair 
rate of interest, and shall then loan funds to its members after direct 
personal examination of the circumstances of the borrowers. The 
educational effect of this is splendid. Sec. 433. 

In England and this country co-operative banking has been con- 
fined to building. The loans are made to the offerer of highest in- 
terest. Every month the borrower pays his interest and the amount 
due on each share. The interest on paid-up money accrues to his 
advantage. Sec. 434. 

This kind of saving is compulsory. Often the interest is too high. 
It is cheaper and better to go to a savings bank. But it tends to in- 
crease the number of men who own their homes. This is educational. 
Sec. 435. 

Government management of industrial enterprise is not good. 
Sec. 436. 

Taxation was inaugurated to support the government. Sec. 437. 

Every tension of government activity to new fields restricts pri- 
vate enterprise in two ways. It limits the field of investment. It 
may appropriate through taxation a part of the returns from private 
enterprise in all other fields. Sec. 438. 

The more the government undertakes the greater the taxation. 
Sec. 439. 

Bridges, lighthouses and public forests are best controlled by the 
government. Sec. 440. 



43 

If taxpayers do not realize that taxes are for their own good, the 
good to be obtained is hindered. Many fancy that if they spend 
money they are doing good in that they are employing labor. This 
is obviously not true unless it is devoted to the increase of public 
wealth. Sec. 441. 

-Many monopolies are such that it is doubtful whether the gov- 
ernment had best take them. Sec. 442. 

Jevons gave these criteria for government ownership. 

1. Where numberless operations can be converted into a great 
government system. 

2. Where the operations are routine-like. 

3. Where they are under the public eye or the gaze of individuals, 
ready to detect and expose failures. 

4. When there is little capital expenditure these principles are 
restrictive, not positive. Sec. 443. 

State ownership of railroads is not very good. Sec. 444. 

Private ownership fosters development and gives better service. 
Sec. 445. 

No general propositions can be maintained with regard to tha 
rates under the respective managements. Sec. 446. 

The whole value of state ownership depends on the kind of gov- 
ernment. Sec. 447. 

The chance of securing the benefits and avoiding the evils is 
greater in a community than in a state. Sec. 44S. 

Non-partisan civil service is absolutely necessary for state busi- 
ness. Sec. 449. 

CHAPTER XIII. 

Many plans have been offered to make the number of adult 
laborers less. Sec. 450. 

One claim is that the reduction of the number of hours would 
create a demand for labor. This would increase the price of labor 
per hour. Sec. 451. 

The wages will not rise to the ten-hour price for eight hours. 
This would cause much hardship if it were widespread. Sec. 452. 

There is something in the argument that increased efficiency, due 
to shorter hours, would make up the difference. In certain indus- 
tries recourse would have to be had to legislation, in order to secure 
horter hours. Sec. 453. 



44 

The eight-hour law falls heavily on those who cannot increase 
their speed of labor. Sec. 454. 

The restriction of child labor is farsighted. Sec. 455. 

A certain amount of regulation of the labor of women seems 
necessary ; but the growing equality of the two sexes is likely to re- 
duce such special legislation to a minimum. Sec. 456. 

The need of legislation in the sweating system is obvious. Sec. 

457- 

The sweating system is a remnant of the old domestic system. 
The evils of it are due to the lack of open competition. Sec. 458. 

Convict labor is under the lease, the contract, and the piece-price 
systems. Under the first the convicts are leased out to the pro- 
ducers. This is bad for the convicts. Under the contract system 
the labor within the prison is put at the disposal of a contractor. 
Under the third the results of the labor are offered to the contractor 
at a fixed price per unit of product. This is the best for the convict. 
But it fails, because the wardens usually lack the qualities necessary 
for a good manufacturer and a good warden. Sec. 459. 

Convict labor depresses wages, because it increases the supply of 
labor. Sec. 460. 

The abolition of convict labor burdens the community by raising 
taxes higher. This would lower general wages by diminishing the 
amount of funds available for production. It would also have a bad 
effect on the convicts themselves. Hand labor would not help the 
convict when he got out. A public prison as a producer would be 
liable to be run at a loss to the state. It would tend to be run 
at less profit than would be possible. There would be little incentive 
to good management. The best means of convict labor is to divide 
it among different industries. Sec. 461. 

It is good to restrict the immigration of foreign labor. Sec. 462. 

The worst form of immigration is the " assisted." Paupers are 
bad. The law against pauper and convict labor amply justifies the 
facts. Sec. 463. 

Immigration is more objectionable in a country which admits the 
immigrants to political power. As long as the country can assimi- 
late it all is well. Sec. 464. 

Unrestricted immigration is good. Those who come are generally 
of a high class. 

More attention is paid to the protection of home industry than to 
immigration, because the capitalists favors it. Sect. 466. 



45 

Many countries have had many experiences with free trade and 
protection. Sect. 467. 

There are three kinds of arguments for protection. The first 
claims that protection makes high wages by keeping money at home 
and by creating an increased demand for labor. The second urges 
the indirect advantages of the diversification of industry. The third 
looks on protection as a military necessity. Sect. 46S. 

The first argument is a survival of the mercantile theory. Money 
spent at home is not economy when you can spend it abroad to so 
much greater advantage. The same result would be obtained more 
cheaply by paying a bounty to those industries which need it. This 
of course would come out of the taxation. The people don't want 
that because it would cost too much. Sect. 469. 
Limitation of imports limits exports. Sec. 470. 
These efforts to accumulate money swell the currency. Wages 
are higher nominally but not really. The best thing is to sell 
all you can and buy more. Sec. 471. 

The country should pay more attention to extending her resources 
than to paying off old debts. It would be better to tax the country 
directly. Sec. 472. 

International trade will of necessity make exports equal to imports. 
Sec. 473. 

The application of capital to industry which can't stand alone is 
poor economy. Sec. 474. 

By protection we really lose money. Sec. 475. 
The cost per unit of product is what counts. The cost per unit 
here is less than in most countries. Sec. 476. 

The nation should devote itself to producing those things in which 
she is most efficient. Sec. 477. 

The second argument is more plausible. The advantage of such 
policy warrants the sacrifice, is maintained by the upholders. 
There are some industries which are exhausting the resources of 
the country. By a protective tariff on certain industries the capital 
would go to them ; then the resources of the country would not 
be diminished so fast. It is conceivable that this might actually 
increase the amount distributed to labor. Sec. 479. 

Protection may foster new industries which would benefit the 
country by giving a chance for the employment of high grade labor, 
which otherwise would not be developed at all. This is their argu- 
ment. Sec. 479. 



46 

If we could assume that, legislation would be wise and uncorrupt" 
able, we might devise a tariff which would be of greater benefit than 
any system of national taxation now in use. But the legislature 
does not look at the problem wisely. Sec. 480. 

The apparent prosperity which follows the just operation of a 
protective tariff increases the probability of mistakes. After a 
while the mills which have been busy making duplicate plants shut 
down, and the laborers are thrown out. The whole industrial world 
suffers from this duplication of fixed capital and restricted facilities 
of exchange. Sec. 481. 

Legislation is more apt to stimulate an exhaustion of soil than a 
protection of it. Protection exhausts all the resources of the pro- 
tected goods. Sec. 482. 

The duty on copper shows its effects in the price of shares in the 
well regulated copper mines. The advantages of protection accrue 
most often to the capitalist, those of free trade to the consumer, 
the laborer. Sec. 483. 

Protection of infant industries in some cases is good. It does 
not, however, justify the expense involved. The period of infancy 
is generally longer than was expected. The nominal reductions of 
the tariff are often ineffectual because the cost of production has 
decreased faster than the decrease in the tariff. All talk about 
protections cheapening prices is bosh. They would have gone 
down anyhow. Sec. 484.. 

The foreigner sells his goods as low as he can since he competes 
with the world. Sec. 485. 

The good of protection is much less than the good of cheap 
consumption. Sec. 486. 

The variableness of the tariff is bad. If the legislature was wise 
and unbiased these theoretical arguments would deserve more 
weight. As it is, the safer economic policy is to adjust the tariff for 
purposes of revenue. Sec. 487. 

The military argument is of course not an economic one. A 
small part of the proceeds of a revenue tarriff would do more to 
put a country on an even footing than is accomplished by a protective 
tariff. Sec. 488. 

Protection destroyed our merchant marine by making materials 
high priced. Sec. 489. 

Subsidized boats prove useful in times of war. It is poor 
economy. It makes an over supply of vessels. This lowers the 



47 

rate of freight. The advantages are hard to show, for the sums spent 
in this way. Sec. 490. 

Many believe in protective tariff because it hurts other nations. 
Sec. 491. 

The commercial hostility which is engendered by the protective 
tariff involves evil both commercially and politically to all parties 
involved. Sec. 492. 

Colonization as a means of national protection and a means of 
finding profitable labor has two advantages, (i) It relieves the 
pressure of labor. (2) It adds to the resources of the country by 
increasing their diversity. Wlien colonies are weak they have to be 
fostered. As soon as they become strong they wibh to be indepen- 
dent. Their only " raison d'etre is a political one. 

CHAPTER XIV. 

The ordinary sources of revenue are prices, fees and assessments, 
and taxes. Prices are charges for special services which people are 
not compelled to accept. A fee is a charge for services which people 
are compelled to accept. A tax is a forced contribution to the 
general expenses of the government. It is not based on special 
services. Sec. 494. 

When the government charges for any of its services more than 
individuals, the payment exacted is known as monopoly price, and 
is treated as a tax on the consumer. When the payment exacted 
is equal to the price of private individuals it is a quasi private price. 
When the price is less than the individual's price, it is a public 
price. Sec. 495. 

An assessment is levied once for all ; a fee is repeatedly levied. 
Assessments are levied on property and there is usually an attempt 
to make the service rendered correspond to the assessment more 
than can possibly be the case with fees. Sec. 496. 

The income which is not included in prices, fees and assessments, 
must be lumped as taxation. Sec. 497. 

Taxes have now come to be regarded as a self levied contribution 
to the general fund for the support of general services. Sec. 498. 

Adam Smith laid down four criteria of a good tax system, equity, 
certainty, convenience of time of payment and avoidance of unnec- 
essary cost of collection. Equity as an ideal is right, but as a 
guiding principle it will defeat the realization of the ideal. Sec. 499. 



48 

Certainty is the fundamantally important object, without which, 
attempts at equality prove illusory. Sec. 500. 

Uncertainty may result from failure to discover the objects which 
should be taxed or from doubt as to their value, or from the 
possibility of collusion between the assessor and the person taxed 
by which consent is given to a low rate. Sec. 501. 

Taxes should be levied on visible tangible objects. Sec. 502. 

The most important of these is real estate. Mortgages should be 
taxed at their full value. The chief obstacle is the apparent loss to 
communities of lenders in allowing projjerty which their citizens own 
to be taxed in the place where it is invested. But the amount 
collected in this way is small compared with the vexation involved. 
Another objection is that real estate will be overburdened, while 
personal property will be relieved. The result will be that by 
relieving the lender from taxation, the rate of interest will be lowered. 
The owner of personal property will thus indirectly pay a larger share 
of the taxes than he does now. If such loans can be reached by 
this indirect method one of the largest items of personal property 
will be taxed. Sec. 503. 

In the assessment of corporate property no deduction should be 
allowed for indebtedness. Sec. 504. 

The attempt to levy taxes on the thing where the value originates, 
rather than on the person who receives the benefit is known as the 
policy of stoppage at source. This ensures the government against 
dishonesty and is much easier. Sec. 505. 

The second source of uncertainty arises from doubt as to the 
actual value of the property or transactions assessed. It is difficult 
to determine the net earnings of a business. Some states substitute 
a low tax on the gross earnings for a higher tax on the net earnings. 
The latter would be more equitable for often a tax on gross earn- 
ings would bear hard when the business is large and the rates and 
profits low. But the superior certainty out weighs the theoretical . 
disadvantages. In levying customs specific duties are more certain 
though less equitable than ad valorum duties. Sec. 506. 

A third source of uncertainty arises from the danger of collusion 
of assessors and tax payers. This comes chiefly where minor civil 
divisions are asked to contribute to the general government on the 
basis of this assessed valuation. This leads to under valuation. 
For certainty of valuation the objects of national and local taxation 
should be kept separate. Sec. 507. 



49 

Double taxation should be avoided in the interest of certainty no 
less than economy and equity. Sec. 508 

A tax which meets the demands of certainty tends to become 
more equitable. The equality quality of the burden will reduce itself 
by the reinvestment of capital. Sec. 509. 

If taxes were continuous this shifting process would make them 
equitable ; but they are not so that there must be constant adjust- 
ments to burdens. Sec. 510. 

A direct tax is one levied on the person who is expected to pay it. 
An indirect tax is one whose burden is presumably siiifted upon some 
one else. The custom duty is an indirect tax because the consumer 
pays it finally, although the importer really pays it at the time of 
collection. Sec. 511. 

The transfer of taxes from one man to another is, sometimes 
perfectly simple and direct. Some taxes are transfered by com- 
mercial competition. A duty is laid on certain goods the price goes 
up because the dealers find it impossible to furnish the goods at the 
old price. Competition raises the price and the tax is transfered to 
the consumers. Some taxes are transfered by industrial competition 
instead of commercial by the withdrawal of capital invested in cer- 
tain lines when the tax has borne heavily, and a slow indirect 
readjustment of the relations of supply and demand. Sec. 512. 

A tax is direct when its immediate burden is shifted only by the 
first of these processes. It is indirect when the burden is shifted by 
the second of these processes. Sec. 513. 

Indirect taxes are not generally available for local purposes. Sec. 

The question of taxation on wealth or income is one on which 
there is no unanimity. Capital and income are really the same in 
their results. A tax is paid out of the capital when the accumulation 
is diminished by just that amount. It is paid out of income when 
the expenditures are cut down to meet the tax. Sec. 515. 

The question between income and property taxes must be decided 
on the basis of certainty of assessment and ease of collection. The 
measurements of capital presents more theoritical difficulties than the 
measurement of incomes ; but practically it rests with the preferences 
and habits of the people. Sec. 516. 

The question of taxation on the basis of equality and progression 
is more important. A property tax can be made progressive without 
much disaster. An income tax involves the exemption of a minimum 
income necessary to the support of a family. Sec. 517. 



60 

A progressive tax increases the difficulty of collection. This 
uncertainty makes the progressive tax inapplicable. Sec. 518. 

The single tax on landed property and monopolized advantages 
have been suggested as a means of combining certainty with equality. 
Sec. 519. 

The losses incident to the collection of government revenue are 
as follows : (i) The consumers have to go without a certain amount 
of goods. (2) A rise in price reduces the consumers surplus from 
the series of transactions. (3) The labor which produced the goods 
is thrown out of employment. (4) A fall in wages reduces the pro- 
ducer's surplus. (5) The field of investment is reduced by the 
amount of reduction of wages. Sec. 519. 

The supporters of the single tax draw a sharp distinction between 
profits and rent. They propose to make land common property and 
let the gain accrue to the public ; or to leave the title in private hands, 
but tax economic rent to its full amount in place of all other taxes. 
Sec. 521. 

Rent and profits are closely connected. Rent has come to be a 
return which depends upon the skill of the investor. The single 
tax would not guarantee him against losses. It therefore would 
destroy the motives to invest a capital in projects of land improve- 
ment. Sec. 522. 

The ethical and political difficulties are more pronouned than the 
economic ones. The land if taken away would have to be paid for 
by the government. Rent would diminish if the land belonged to 
the government, because no one would improve their land. As a 
fiscal measure it is radically defective. Sec. 524. 

The assessment of improved land for more than the uuimproved 
is bad because it does not foster progress. Sec. 525. 

Poll taxes are neither productive nor equitable. Inheritance taxes 
are just but easily evaded. Taxes on occupations are managed in 
this country as a means of rectricting the number of those engaged 
in certain kinds of business. See. 525. 

Indirect taxes may be divided into three groups : excise charges, 
exports duties and import duties. Sec. 526. 

For purposes of revenue, indirect taxes have several disadvantages 
as compared with direct taxes. It is hard to predict the amount of 
income. High taxes foster evasion of taxes. High custom duties 
foster home industry, which tends to replace the imports. Sec. 527. 

The revenue from fines and forfeitures has ceased to be important. 
Sec. 528. 



51 

Unpaid bills of the government are the floating debt. Formal 
obligations to pay the interest and principal on debts make the debt 
a funded debt. When these obligations set a date of maturity they 
are bonds. When the principal is paid by the issue of a new loan, 
the operation is known as refunding. Sec. 530. 

A nation cannot permanently rely on loans to pay its debtors. 
Sec. 531. 

There are two cases where recourse to loans is necessary, (i) In 
an extraordinary emergency like war. (2) In the case of permanent 
productive investments. In war wealth is destroyed, but property 
rights and relations are conserved. Sec. 532. 

The great advantage of loans over capital is that they enable the 
government to secure unequal contributions from different citizens. 
They are placed with good feeling, taxes are more burdensome. 
Sec. 533. 

Things which do not promise a return excepting war and the like, 
should be undertaken with the revenue from taxation. Sec. 534. 

Equally bad with unnecessary loans are those for speculative enter- 
prises. Sec. 535. 

In the case of loans for industrial improvements which promise a 
sure return it is different. It is best to keep the loan within such 
limits that the investment will pay interest and make a slight return 
to capital. Sec. 536. 

It is best to pay war debts as soon as possible. Sec. 537. 

Unless fiscal checks are rigidly applied and fiscal deficits made up 
by present taxation rather than by promises for the future, the danger 
of waste far outweighs the probability of good. Sec. 538. 



QUESTIONS FOR REVIEW. 

For what reason does Hadley compare public wealth with private 
property ? 

What did Mill think prevented the abolition of misery among the 
lower classes ? 

What does Hadley think ? 

Is it sufficiently safe to help the poor; (i) by outdoor relief; (2) 
by indoor relief; (2) public works; (4) compulsory insurance; (5) 
labor bureaus ? 

What are the differences between the commercial and socalistic 
theory of value ? 

Name some cases in which state regulation of competition is 
good ? 

How does Hadley treat the equation of demand and supply ? 
How does Mill ? 

What determines the value of bye products ? Why is gambling 
bad? 

Why is insurance good ? 

What are the services which speculation render to the community ? 

How great a part of modern profits is compensation for risk ? Is 
this justifiable? 

How do the following encourage the investment of capital ? 
Private ownership of land ? 

Patents, copyrights and tariff to protect young industries ? 
Limited liability of corporations ? 
Interest ? 

Why is competition keen with large investments of capital ? 
What devices aim to check this ? Apart from legislation what pre- 
vents monopolies from raising prices ? 

What are some of the legal methods of regulating monopolies ? 
Which does Hadley think the most promising ? 

What are the evils which tabular standard and bimetallism aim to 
remedy ? 

Is this slow depreciation of gold unjust to debtors ? Is it a handi- 
cap to production. Is the concurrent use of gold and silver as legal 
tender practicable ? 

What is Gresham's law ? 



53 



How does domestic exchange compare with foreign exchange ? 
How are they similar ? How are they unlike ? 

Why should the increase of bank notes be guarded against ? 

How is the U. S. government at present doing a banking business ? 

How does Hadley view distribution ? 

How does Hadley think interest and rent are determined? Does 
the amount of accumulation correspond closely to the rate of interest ? 
Is rent an unearned increment; according to Hadley? According 
to Mill ? 

According to the popular theory what is the demand for labor ? 
What is it according to the wage fund theory ? What, according to 
the residual theory ? 

What are the three arguments against machinery ? Are they valid 
and why ? 

What are the distinctive characteristics of the modern trade union- 
ism and its methods. 

Why have profit sharing schemes succeeded better in Europe than 
in the United States ? 

Why has consumers ' corporation been more successful than pro- 
ducers ' ? 

Under what conditions is the government management of industry 
successful ? 

Is the popular argument for an eight hour labor day sound ? 

Should convict and pauper be allowed to compete with free labor ? 

Explain the popular arguments for the protective tariff ? What 
is the infant industries argument ? The military argument ? 

What are the three kinds of taxes ? 

What is the fundamentally important object ? 

What is the policy of stoppage at source, equality and progression 
of taxes ? 

What is the single tax ? Is it good ? In what cases are public 
loans desirable ? 



OCT IS WIS 



